Housing affordability is a major problem in America. Home prices spiked during Covid-19 and then the Fed’s war on inflation sent mortgage rates surging. Elevated mortgage rates and home prices have caused prospective homebuyers to push the “pause” button on buying a home.  Additionally, homeowners have been reluctant to put their properties on the market and risk potentially forfeiting the ultra-low mortgage rates they locked in during the pandemic. This has  created the perfect storm for a housing market that’s been more or less frozen. 

Home sales are expected to remain constrained as long as mortgage rates remain well over the 6% to 6.5% level. According to the most recent economic projections from June, the Federal Reserve doesn’t see inflation subsiding to 2% on a consistent basis until 2026, which could mean higher but declining short-term interest rates for the next two years.

Inventory of unsold homes rose across the country this week — but at less than 1% rate. Slower growth of unsold homes on the market is a result of too few sellers on the supply side and stability on the demand side. Due to the weak or declining homebuyer demand, the unsold supply of homes continues to build. What is the economic impact should these homes continue to pour into the market, but remain unsold?

Typically, when there is a flood of supply in the housing market, housing prices come down, making homes more affordable for potential buyers, and thereby “unsticking” the market. However, this is not the case in our current market.  Despite the increase in homes on the market, average home prices still remain high. According to the National Association of Realtors (NAR), existing home prices were 4.2% higher in July compared to a year ago after rising for the 13th consecutive month. Yet, just because home prices keep rising, does not mean that a household’s income keeps rising. In order to qualify for the median-price existing single-family home in today’s market, a potential buyer must have a household income of around $110,000. Three years ago, households needed to earn about $59,000 to qualify for the same type of home. Therefore, lack of rising income and those who are locked into low interest rates, are  keeping buyers from buying and sellers from selling, effectively “freezing” the market. 

A frozen housing market does affect the economy. Spending linked to home sales have dropped. There has also been a drop in the demand for work required for fixing up or renovating homes to get them ready to sell. Lack of home sales also means reduced sales or commissions for professionals handling the logistics of homes sales. According to the National Association of Home Builders, these activities normally account for 3-5% of the U.S. output.

On the plus side, the millions of households that are “locked into” cheap mortgage rates theoretically  should have extra money to spend on other things. This may be one reason that consumer spending has remained resilient despite higher interest rates.

The U.S. labor market is also affected by the frozen housing market. Workers are reluctant to accept job offers in other states, if it means sacrificing their low mortgage rates. So labor mobility has been significantly reduced due to this “locked in” effect. 

The rental market is also affected by the frozen market. People who cannot afford to buy a home, end up being renters. When there is a flood of renters in the market, rental prices go up. Because rental prices are high, individuals can no longer afford to live on their own. They either end up moving back in with family, or end up having to have roommates just to survive.

The Federal Reserve (FED) may be a primary key in unlocking the gridlock in the housing market. Although the FED has not cut the federal funds rate in over a year, lowering the federal funds rate, which highly influences mortgage rates, would be a step in the right direction to make housing more affordable and accessible for buyers. 

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